Flying Auto Rental Rates Are the Slowest Race to Car Sales

(Bloomberg) — Just as things seemed to be returning to normal at Rhett Ricart in Columbus, Ohio, auto dealers — after the pandemic’s inventory shortages and runaway price increases — emerged a new obstacle to buyers blocking a deal: falling interest rates on auto loans.

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“They’re making money,” said Ricart, who owns stores that sell models from Ford Motor Co., General Motors Co., and Nissan Co. “Customers are not shocked by the increased cost of the vehicle, they are shocked that they have to pay 7% or 8%. You are talking about tons of money.”

As the Federal Reserve steadily increased the federal funds rate last year to try to tame inflation, the average interest rate on loans for new cars jumped to 8.95% last month, up from 5.66% a year earlier, according to researcher Cox Automotive. That, with average car prices now approaching $50,000, has pushed auto loan payments to $784 a month on average, up from about $177 a month since March 2020 when the pandemic began.

Dealers now say interest rates are the No. 1 factor keeping their business in business, and inventory shortages and the economy are replacing them as the top problems over the past year, a Cox survey of auto dealers showed. Rising rates are weakening market momentum even as auto sales are expected to rise as much as 7.3% in the first quarter, according to a forecast from JD Power and LMC Automotive.

Many of the largest car companies, including General Motors and Corp. Toyota Motor Corporation will report the results of four US sales on Monday.

“A lot of these things that seemed to be tailwinds at the very beginning of the year are turning into headwinds very quickly,” Jonathan Smoke, Cox’s chief financial officer, told reporters March 27. “Anyone who tells you to have a firm opinion about us. It’s too much, I don’t know what, they’re smoking something.

On top of rising mortgage rates, the banking crisis triggered by the collapse of Silicon Valley Bank last month has further strained credit, making it harder to qualify for a car loan.

Still, automakers remain confident millions of buyers are ready to flood dealer lots as demand picks up after years of supply shortages and pandemic-related factory and showroom shutdowns.

The annual sales rate is expected to rise to 14.4 million in March from 13.5 million a year ago, according to an average of researchers looking at eight markets. Prior to the pandemic, annual US auto sales have topped 17 million for five consecutive years.

“Consumer confidence, or at least consumer behavior, will continue to be soft,” Chris Reynolds, chief executive of Toyota Prius in North America, told reporters. “People still have money in their pockets, and they want to buy cars.”

In fact, consumer confidence fell this month on the University of Michigan Consumer Sentiment Index.

“A lot of the demand for so-called inclusion has basically been wiped out because of a lethal combination of prices, interest rates and payments,” Smoke said.

Automakers are trying to offer a higher interest rate cash discount. Ohio dealer Ricart said Ford has made a big difference by offering 1.9% financing for 60-month loans on pickup trucks in its area.

eat profitability

The output of automakers has been swelling for three years as supply chain snags to reduce inventory and caused prices to hit record levels. Now that supply is catching up with demand, companies are giving up some profit in an effort to keep the car affordable.

“At all costs we can’t pass on what we put into our profit,” Jack Hollis, executive vice president of Toyota’s North American unit, told reporters. “How much can he spend, month after month increasing” price?

A shortage of semiconductors that has left the seller empty lots in recent years has been disappearing as inventories have risen 70% from this time last year, according to Cox. Cars now sit on dealer lots for an average of 34 days before being sold. That’s up from 24 days a year ago, data from car tracker Edmunds.com show.

Those favorable factors are still multiplying at rising rates. The average car loan payment was $8,764 in February, up from $5,395 a year earlier, according to Edmunds.

“It’s a tough prospect to sign your name off a $40,000 loan in this area,” Jessica Caldwell, executive director of research at Edmunds, said in an interview. “People look at the moon and go for a walk.”

In Columbus, Ricart sees buyers canceling orders for difficult models that were signed months ago, when financing was cheaper.

“When they ordered them the interest rate was 2% and now it’s 8%,” said Ricart. “They ended up paying a lot more for that vehicle than they thought.”

–With assistance from Gabrielle Coppola.

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Ava Grey

Hi there! I'm Ava Grey, an enthusiastic article writer with a passion for the arts, fashion, and staying informed about current events. As a journalism student at the New York Academy of Art, I'm driven to use my writing to create positive change and spark meaningful conversations. I'm particularly interested in contemporary art and sustainable fashion, and I love exploring how people use these mediums to express themselves and communicate their values. I believe that staying informed and hearing different perspectives is essential for personal growth and learning, and I'm always eager to engage in lively debates and discussions.

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